Merchant cash advance, also known as MCA, allows a company owner who takes credit cards as a form of payment to obtain a financial advance regularly through an established merchant account. This form of borrowing is not a loan, but instead an advance based on future revenue of credit card sales made by the business. Any small or large business can apply for a merchant cash advance account in order to have a lump sum of money deposited into their bank. The process of obtaining an advance is quick, with most users having their funds within a matter of hours after setting up a new account.
How Merchant Providers Evaluate Companies
Providers of cash advance accounts will evaluate their clients based on risk and business assessment. They weigh criteria differently than a typical bank would do when approving a loan. MCA providers look for daily receivables and credit card receipts to determine if a company will be able to pay back the advance in a timely fashion. As a result, the business is essentially selling a portion of future revenue to obtain capital immediately.
The average interest rate on MCA accounts are higher than small business bank loans. Providers normally approve accounts for business owners who would otherwise be denied a typical loan, which is why merchant accounts have high interest rates to protect the provider from payback inability. The owner may not qualify for a loan, but they should ideally have a steady flow of credit card payments going through their company on a regular basis. Business owners should be fully informed by the provider of potential ROI risks before applying for an account.
How Does it Work?
A contract is made between the MCA provider and the small business owner regarding the specific advance amount, repayment schedule and percentage for hold back options. Once the contract has been signed, the advance will be transferred to the business owner’s bank account in direct exchange for a future percentage of credit card receipts.
Every day, the agreed upon amount of credit card receipts will be withheld by the provider to pay back the MCA. This process is referred to as “hold back” and it will continue until the full amount of the advance is paid off. There is no collateral required to open a merchant account as you would find with typical bank business loans.
The more payments a company receives through credit card transactions, the faster the advance will be paid off. If the company experiences a day or week where transactions and sales are slow, the draw on the account will be much less. This means that when a business is experiencing a slow period, payback on the merchant account will be slower and fewer funds will be deposited.
Payback and Advance Costs
Business owners will find that they pay anywhere from 20 to 40 percent back on the amount that the account was worth. This is displayed as a factor rate when applying for an account, so consider this amount to save yourself money in the future when repayment is made. There is a difference between what you receive in the account and what you pay back to fulfill the contract agreement. For example, there might be a hold back amount of 15 percent and a repayment APR of 30 percent.
The amount you pay back is dependent upon how many sales you make, what your company earns and risk factors considered when applying for the advance. Most business owners will be approved for an MCA account, so approval isn’t the issue. The issue comes when you’re paying back 50 percent more than you borrowed.
Is It The Right Option for Your Business?
Merchant accounts are ideal for company owners who would normally be denied a business loan. Most newly-established businesses are denied a loan because of how typical it is for brand new companies to fail within their first year. In this case, an MCA account will give you quick cash that you’ll need to grow and expand your company. If, however, your company is not stable or is bringing in a regular flow of cash, a merchant cash advance can be the ruin of your business. You need to know that your company will bring in the money it needs to pay back the advance in full and fulfill the contract you’ve signed.
Some of the top merchant accounts are Flagship, Payment Depot, Helcim and Payline. All of these companies work directly with business owners to open suitable merchant accounts to meet their needs. Credit scores are never a deciding factor in whether or not you’ll be approved, so even owners with poor scores can be ratified. You will need proof of credit card receipts and business capital when applying for one of these accounts.